Friday, October 3, 2014

At the Epicenter of a Euro Crisis?

Greece's lagging progress in the privatization of state assets was expected to be the focus of talks on Friday between officials of the privatization agency TAIPED and troika mission chiefs with the foreign envoys said to be pressing for selloffs worth 10 billion euros by the end of 2016.

According to sources, the target of 1.5 billion euros for 2014 is considered very difficult to achieve due to a series of postponements to tenders and competitions.

At 2 p.m. troika envoys are scheduled to meet with Energy Minister Yiannis Maniatis with further talks with Labor Minister Yiannis Vroutsis due at 6 p.m. An initial meeting between the troika and Vroutsis on Thursday allowed each side to present their views on proposed changes to the pension system and on labor reforms.

On Saturday morning, at 9 a.m., foreign auditors are to meet with Finance Minister Gikas Hardouvelis in a bid to reach a consensus on the draft budget for next year which is to be presented in Parliament on Monday. According to sources, the Greek side predicts that the primary surplus for 2015 will be close to 2.8 or 2.9 percent of gross domestic product, close to the 3 percent target.

In my last comment on Greece, I went over why the country's pension system and economy is at a breaking point. I thought I'd share with you some of observations from my recent trip to Greece. I'll give you a glimpse of the good, the bad, and the ugly and try to keep it entertaining as well for those of you who are thinking of visiting this beautiful country in the future:

I left on September 6th and flew directly to Athens with Air Canada. I booked my flight last minute and paid accordingly ($1,700). I'm undergoing a research study for a new vaccine for MS using my own blood and it is hard to book trips ahead of time because I need to be in Montreal at specific dates as part of the protocol.

The flight to Greece is always fun. It was a direct flight, lasted nine hours, but since you leave in the late afternoon, you get to sleep (flight back is torture, ten hours and it's during the day). I flew Air Canada because I couldn't find the dates I wanted with Air Transit, the other airline that flies directly to Athens from Montreal in the summer.

Even though the seats are a bit tighter, I prefer Transit but Air Canada Rouge was fine. The staff is young and pleasant as opposed to the typical ones they have on domestic flights. The only thing that pissed me off is that I wasn't told to download the Air Canada App on my iPad to view movies so they told me to rent their iPad for $10. I made a big stink of it and the guy ended up giving it to me for free because his credit card machine wasn't working properly (What happened to the good old days when everything was provided to us for free? For $1,700, we shouldn't be renting any iPad or paying for wine and booze on the flight!).

Once I got to Athens, clearing customs was a breeze. They move very quickly and you don't have to walk a lot like we do here at Montreal's Pierre-Elliott Trudeau airport. I love the airport in Athens and I found out that the deal with PSP Investments was recently finalized. PSP now owns a 40% stake in Athens' Eleftherios Venizelos airport, with the state owning the biggest chunk (55%). I still think this was a great purchase for PSP with the only major risk being political (more on that below).

Once I picked up my bags, I proceeded to go upstairs to the Aegean Airlines counter to take my flight to Heraklion, Crete (Travel tip: once you exit the doors to go outside, turn to your right and the elevators are close by to go up to second floor). I love Aegean Airlines and highly recommend you book your tickets online as early as possible to get the best deals (Travel tip: Aegean provides you with a complimentary copy of their Blue Magazine, which is a great resource to find beautiful boutique hotels on the Greek islands).

Once I arrived in Crete, I felt at home. I was greeted by my sister, nephew and bother-in-law who were excellent hosts even though they were very busy. I quickly settled into my routine of waking up late, having my Greek frappé, then heading off to the beach at Karteros or to the Candia Maris hotel where I ate like a king, tanned and swam. I alternated between the beach and hotel but the beach was my favorite because I love the ocean breeze and listening to waves while tanning and snoozing.

I spoke to a lot of cab drivers in Heraklion and all of them were complaining that even though there was record tourism in Greece, the tourists in Heraklion are all "packeto," meaning they are all staying at all inclusive hotels and spending no money for cabs and restaurants (tavernas). Some cab drivers complained of French and Russian tourists trying to bargain with them for cab fares, which I find ridiculous (try bargaining with a NYC cabby and they'll send you to hell!).

It's true that there was record tourism in Greece and that in Crete, as opposed to Santorini, Mykonos and other islands, there are a lot of hotels that operate with large European travel agencies to fill their hotels up with all inclusive tourists who fly directly to Crete from Germany, England, France and other places and stay on the island for a week or two at a ridiculously low cost (Crete has two main airports, one in Heraklion and one in Chania).

I'm not a big fan of all inclusive tourism, especially in Greece where it's a crime to stay at your hotel and not venture off to see museums and walk around and eat at local restaurants. Even in Heraklion, which is not considered a touristic mecca, there are great places to walk, browse stores and amazing little restaurants (Travel tip: My favorite little taverna in Heraklion is Terzaki near Agios Dimitrios church but there are plenty of other great restaurants like Loukoulos and 7 Thallasses where my cousin took us to enjoy an exceptional fish meal that was out of this world).

But all inclusive hotels are great for hotel owners because they know their revenues beforehand. Also, while cabbies may not like them, record all inclusive tourism is still good for the Greek economy because you have to feed these tourists and provide them with beverages. In other words, the heyday of tourism is gone (the good old eighties and nineties when you traveled to Greece and converted USD or CAD into drachmas), but it still directly or indirectly supports many jobs in an economy fighting to climb out of a depression.

Also, it's worth noting that things are not great in the eurozone. It's going through its own deflation crisis, so a lot of European tourists visiting Greece are on a very tight budget and are happy to take their family on an all inclusive vacation. Of course, there are plenty of others who can afford to stay at luxury villas in Mykonos, Santorini, Crete and elsewhere (Travel tip: One of the hottest luxury resorts in Greece right now is Costa Navarino which was fully booked for the summer season. In Crete, my favorite luxury resort is the Blue Palace in the beautiful Elounda/ Agios Nikolaos area where there are other internationally acclaimed luxury resorts. If you go there, get ready to pay big bucks but booking early might save you a little).

There were less Russian tourists this year than last year in Greece and Crete. The sanctions hurt two major Russian travel agencies that went bankrupt and the fall in their currency didn't help. I met a couple of Russians in Crete who told me we're being fed propaganda nonsense on Ukraine. I agreed with them and Greeks are very pro-Russian and think the western media is spreading lies and misinformation on the "Ukraine crisis" (What else is new? Read my comment on fracking EU sovereignty).

The banking system in Greece is on life-support. There are so many Greeks who took out big loans prior to the crisis and are unable to pay them, especially now that they're getting hit with real estate taxes. For example, I heard of a police officer making 1,900 euros a month who took a loan for 200,000 euros to build a 280,000 euro house outside Heraklion for him and his family (2 children). Once the crisis hit, his income fell to 1,100 euros a month, the value of his house plummeted by 50% or 60%, and he has to pay real estate taxes, leaving him unable to pay the loan. The banks were stupid to provide him and hundreds of thousands of other Greeks with easy credit and they don't want to foreclose on homes (by law, you can't foreclose on a first residence and even if they did, there are no buyers), so they try to negotiate and get whatever they can.

One of my uncles who is a very respected businessman in Crete told me that the problem isn't just with those that don't have money to pay off their loans because their incomes were reduced or they lost their job. "The problem is also with the rich tax evaders who have a lot of money, took out huge state-backed loans and aren't paying them back or their fair share of taxes" (like Italy, tax evasion is a national sport in Greece).

I also met with a few self-employed businessmen who are hurting because of the crisis, had to fire people and are unable to pay their IKA or TEVE, which is their social security and medical insurance claims. One cab driver told me: "I have to pay 850 euros every 2 months and I'm worried that when I need it, there will be no pension or money to cover my medical expenses."

The biggest problem in Greece remains the bloated public sector. I'll keep saying it because I think it's criminal to have people in the Greek private sector paying one tax after another to support the bloated public sector. 50% of working Greeks work in the public sector and many more rely of the public sector for work. The Greek government has stiffed many private businesses (owing them money they'll never receive), forcing them to shut down, and no politician in Greece has the guts to drastically reduce the size of the public sector. Why? Because they're all vying for votes, lying through their teeth, promising them that they can afford to maintain the status quo, which they know they can't afford.

It's a national travesty.Not one public sector job was cut throughout this crisis. The brunt of the crisis was felt in the private sector where massive unemployment is wreaking havoc on the economy. Public sector workers were forced to accept drastically lower incomes and pensions, but that was the least that should have been done. Much more reforms are needed to curb the excesses in the public sector but with Greece in a depression, nobody wants to see more pain.

Greece desperately needs foreign investment but there are too many special interest groups (like pharmacists, lawyers, etc) and powerful wealthy families who are making it impossible for foreign multinationals to invest in Greece. Not to mention that corporate tax rates and bureaucratic red tape are insane, all to further support a lot of unproductive public sector workers who don't have annual performance evaluations or credentials for the jobs they occupy. There was a recent move to inspect credentials of public sector workers but the left-wing SYRIZA party blocked it to garner votes (ridiculous, Canadian public sector workers are a lot more productive than most of their Greek counterparts but Greek private sector workers work much longer hours than their Canadian and American counterparts).

Young workers in Greece are grossly underemployed and taken advantage of. The unemployment rate for Greek youths is close to 60% but those that are lucky to have a job are paid peanuts (minimum wage is roughly 500 euros) and been taken advantage of. For example, I met one young lady working as an accountant in Heraklion for a decent company, making 700 euros a month, which barely covers her rent, food and gas. You have a generation of highly intelligent, highly qualified young Greeks that are either unemployed or grossly under-employed. Most of them are unable to move out of their parents' house and they are literally scraping by to survive with little or no savings. If they lose their job, they get 350 euros a month in unemployment insurance for a year and then nothing (there is no welfare in Greece). Forget about having kids, a house and a productive life. The Greek dream is dead which is why many are learning a second and third language to get the hell out of Greece and find work elsewhere, but as we all know, that isn't easy either.

Many Greeks wrongly blame the Greek Orthodox Church. There were plenty of Greeks who told me that the Greek Orthodox Church pays no taxes on its huge real estate holdings. My uncle in Athens set the record straight: "The Church gave away 92% of its vast real estate holdings to the government during the crisis in order to make priests get paid a token amount as civil servants. These priests have many children and are not paid well, often dying in poverty. The Church (and other charities) pay full taxes on their remaining real estate holdings and they do a lot of great work which the media doesn't cover to help thousands of poor and disabled Greeks. Come with me to the church down the street and I will show you many ladies volunteering their time to cook meals for desperately poor families. They do this for free because it's part of our faith." Of course, my uncle is a good Christian who pays all his taxes and volunteers his time to countless charities, including visiting prisoners who were jailed for illegally crossing the Greek border.

The Greek media is thoroughly corrupt. I can't overemphasize this. The media routinely extorts and blackmails government officials and businessmen to gain loans or debt forgiveness. The big media barons in Greece who own newspapers and television chains owe hundreds of millions of euros and they are not paying up. Instead, they threaten government officials that if they don't get what they want, they'll publish slanderous articles on them or make them look terrible on television. They all do this which is why I take everything I read or hear in Greek media on domestic affairs with a shaker of salt (their coverage of international affairs, however, is way better than the crap you'll find on Canadian and American TV).

The Greek justice system is a joke. There is no real justice in Greece because the judicial system is in critical condition. It's too slow, too arcane and by the time you take someone to court, it's too late to recover funds because the money is either gone or parked offshore. Hundreds of thousands of Greek businessmen are owed millions in euros which they will never see, no thanks to ridiculously weak Greek judicial system which favors crooks and tax evaders.

The Greek healthcare system is a joke. There are way too many doctors in Greece (they accept too many medical students studying abroad in countries like Bulgaria, Romania and Italy) and most of them are starving because they're not being paid by the state. The top cardiac and orthopedic surgeons are still making off like bandits, but the state is starting to nab many of them who have millions of undeclared income in their bank accounts. But most doctors are not being paid by the state, forcing many of them to accept fakelakia (envelopes stuffed with cash) to survive. Big pharmaceutical companies are cutting back their staff and budgets in Greece after being hosed during the crisis where they accepted Greek bonds as a form of payment for expensive drugs. Public healthcare is running out of money forcing many Greeks to get private healthcare but only a few can afford the premiums.

The Greek education system desperately needs funds. One area where Greece still scores high marks is in education. Greek students study much harder than their North American counterparts and their mathematics, physics, engineering and medical students are among the best in the world which is why the very best often get scholarships to study at top European and American universities. There is a tremendous amount of pressure placed on kids to study insane hours to score high to be placed in a good university, hopefully near where they live so that their parents can afford to send them to university. But the cutbacks in education have been draconian and many professors are trying to offer the same level of education on a shoestring budget.

Greek deflation continues to be a scourge. The latest data shows Greek consumer prices fell 0.3 percent in August, with the annual pace of deflation slowing from a 0.7 percent drop in July. Deflation remains the biggest worry in Greece and the rest of the eurozone and the ECB has fallen way behind the deflation curve, which is why I see further weakness in the euro. In fact, I see the euro falling to parity over the next 12 months, and possibly even lower.

Greeks hate the new real estate tax. The number one complaintI heard on my trip was on the new real estate tax (ENFIA). Greeks hate it and in many cases they are justified to hate it. Why? Because it is based on pre-crisis valuations and does not reflect the true economy where it's next to impossible to sell real estate in this market.Worse still, rents have plummeted and many people are not paying their rent (good luck taking them to court).

The mysterious case of burnt Porsche Cayennes. The Greek government is taxing everything it can get its hands on. Swimming pools, cars, real estate and more (still needs to go after bars and clubs in Santorini and Mykonos). One ingenious way of taxing is called tekmirio. It's a consumption tax on everything, including the apartment Greeks rent in a nice neighborhood. If you drive a fancy car in Greece, you're going to get socked with heavy taxes. It's come to the point where many people have given in their license plates because they can't afford the upkeep on their expensive cars (gas is also taxed very heavily in Greece). Some Greeks actually started driving their fancy cars into remote areas and burning them (claiming they were stolen) to collect insurance money but when the insurance companies caught wind of an unusually high number of scorched Porsche Cayennes, that put a dent in this scheme.

Dark political clouds on the horizon. The biggest cloud hanging over Greece right now is political. It's dealing with the SYRIZA virus. If Alexis Tsipras, leader of SYRIZA, manages to win a majority government (impossible but he might align himself with others to form one), then you might see yet another major eurozone crisis emanating from Greece. Unfortunately, Greeks don't vote with logic, they vote against reforms which they hate, even if it means possibly sending the country back to the Dark Ages. I blame the myopic austerity policies for this which have spurred deflation and done nothing to promote growth, allowing SYRIZA and other political extreme parties to gain in popularity. Germany, troika and the current Greek coalition government are all to blame for this as they continue to ignore the euro deflation crisis.

Love that Greek humor! So the leaders of Germany, France and Greece are all asking God a question. Germany's leader asks "when will Deutcheland be the world's economic power?," to which God replies "100 years." Germany's leader starts crying. France's leader also asks the same question and God replies "200 years." He starts crying. The Greek leader then asks "when will we pay off our debt?". God starts crying (lol).

Greece remains the best place to vacation in the world. In my humble opinion, you simply can't beat Greece as a place to vacation. Great weather, beaches, food and it's a relatively safe place compared to other places in the world. Sure, there are some parts of Athens that are scary at night but nowhere near as scary as some parts of big American cities. The Greek islands are amazing, you can literally walk anywhere and feel extremely safe.

I leave you with some pics and one final travel trip. A lot of you are itching to visit Greece and many of you have already visited. You might think it costs a fortune but if you plan your trip early and do some research, you'll have a great vacation without spending a fortune.

The best time to visit Greece is in September after the summer madness. The water is warm and the weather is perfect (only had a couple of days of excessive heat). And while everyone thinks Santorini and Mykonos are the best places to visit, the truth is these islands are beautiful but they've become way too commercialized and outrageously expensive, especially during peak season (someone told me spaghetti with meat sauce costs 30 euros in Mykonos, which is insane!!). Apart from Crete, I highly recommend other islands like Kefalonia and Milos where you will find the best beaches in the world, beautiful landscapes and reasonable accommodations.

There are other beautiful places on the mainland and in northern Greece and it's not just about beaches, sun and fun. It's about history, archeology, mountains, museums and monasteries. In short, Greece offers a lot in terms of culture and history and I highly recommend you visit places like Meteora, Delphi and numerous other historic sites.

Where did I like it most in Crete? I went to Chania twice and swam at this amazing beach called Marathi right next to where the American army base is located. If you go there during the summer, it's still amazing but chaotic, packed with people. The first time we went to Chania, we went into the city after the beach to eat at Monastiri, a famous taverna at the old port offering delicious Cretan food (Food tip: Great food is still relatively cheap in Greece, especially in Crete. Order their Greek salad with mizithra cheese, Cretan dako, dolmades, gopes, staka with fries, and their kebab dish called yiaourtou, my personal favorite. And in Crete, they offer you fresh fruits, desert and raki after every meal so forget about dieting while on vacation there. Swim as much as you can to burn off those extra calories).

I'll share a few pics with you but try no to get jealous, it really isn't as spectacular as it looks! -:)

1) Having fun with my nephew at Marathi beach in Chania:

2) At Loukoulos taverna, right on Marathi beach (I get hungry just looking at this pic, lol!)

3) Reflecting during my last day on the beach in Heraklion (Gap V-neck T-shirts, cargo shorts, flip flops and sun glasses are a must...I was probably thinking why the hell I am going back to Canada?!?)

4) One of my favorite pics taken in my great grandfather's village of Asites after a great meal at a taverna overlooking the village (I love that landscape, feels like Tuscany and the air is so fresh)

5) The view from Satan's Port, a beach outside Chania which I didn't attempt to climb down rocks in flip flops to reach but it's spectacular (my cousin's husband and brother-in-law went down and loved it)

6) Athens by night. Enjoyed dinner and drinks at the top of the Hilton Athens with friends at the end of my trip (you pay for that view overlooking the city and the Acropolis but it's worth it!)

All in all, I had a great time with my family and friends. Greece is still reeling from its depression but things are slowly improving (from a very low base). The darkest cloud hanging over Greece right now is political uncertainty. Once it passes this uncertainty and takes steps to promote growth, the country will be back on the right path.

As far as I am concerned, it's back to Montreal and back to reality. I am actively looking for new opportunities and have reached out to a few pension funds in this city that know me well. In the meantime, I continue to publish the best damn blog on pensions and investments and remain the most underrated and underpaid pension analyst in the world!

I remind all of you, especially institutional investors that regularly read my comments, that it takes a lot of time and effort to research and write these comments. Please contribute via PayPal at the top right-hand side and show your appreciation. If you take the time to read my comments, take the time to contribute.

Below, an excellent interview with economist Richard Duncan, author of The New Depression. I saw this in Greece and highly recommend you take the time to listen carefully to Duncan's comments. It cements my thinking that there will be more printing ahead, a major liquidity rally in risk assets, followed by a protracted period of debt deflation. I wish you all a great weekend.

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I am an independent senior economist and pension and investment analyst with years of experience working on the buy and sell-side. I have researched and invested in traditional and alternative asset classes at two of the largest public pension funds in Canada, the Caisse de dépôt et placement du Québec (Caisse) and the Public Sector Pension Investment Board (PSP Investments). I've also consulted the Treasury Board Secretariat of Canada on the governance of the Federal Public Service Pension Plan (2007) and been invited to speak at the Standing Committee on Finance (2009) and the Senate Standing Committee on Banking, Commerce and Trade (2010) to discuss Canada's pension system. You can follow my blog posts on your Bloomberg terminal and track me on Twitter (@PensionPulse) where I post many links to pension and investment articles as well as my market thoughts and other articles of interest.

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